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Bank of Russia cuts key rate by 1.5 pp to 8% per annum

The Bank of Russia reduced its key rate by 1.5 percentage points to 8% per annum, noting low rates of consumer price growth, according to a press release published on Friday.

"On 22 July 2022, the Bank of Russia Board of Directors decided to cut the key rate by 150 basis points to 8.00% per annum. Current consumer price growth rates remain low, contributing to a further slowdown in annual inflation. The decline in business activity is slower than the Bank of Russia expected in June. However, the external environment for the Russian economy remains challenging and continues to significantly constrain economic activity," the regulator said, adding that it would consider the necessity of key rate reduction in the second half of 2022.

The key rate is expected to average 10.5-10.8% in 2022, down from 10.8-11.4% expected in June, according to the Central Bank's new forecast. The outlook for 2023 has been downgraded to 6.5-8.5% from 7-9% expected in June, whereas the 2024 projection remained at 6-7%. In case of a further budget deficit expansion, tighter monetary policy may be required to return inflation to target in 2024 and keep it close to 4% further on, the regulator noted.

In its baseline scenario, given the current trends in economy, the Bank of Russia forecasts GDP decline by 4-6% in 2022 compared to 8-10% expected in April. GDP growth in 2023 is expected to contract by 4-1%, whereas in 2024 the regulator projects GDP growth by 1.5-2.5%. In April the Central Bank expected GDP contraction by 3-0% in 2023, and growth by 2.5-3.5% in 2024.

The Bank of Russia has also upgraded its annual inflation outlook for 2022 from 14-17% to 12-15%, while the forecast for 2023 remained at 5-7%. "Important factors for the future inflation movements will be the ruble exchange rate dynamics, effectiveness of import substitution processes, as well as the scale and pace of the recovery in the imports of finished goods, raw materials and components," the regulator said.

That said, current consumer price growth rates remain low, contributing to a further slowdown in annual inflation. "In June, annual inflation fell to 15.9% (after 17.1% in May) and, according to estimates as of 15 July, fell to 15.5%," the Bank of Russia added.

The outlook on the Urals oil price has been upgraded to $80 from $75 per barrel for 2022, to $70 from $65 per barrel for 2023, and to $60 from $55 per barrel for 2024. The capital outflow projections have been increased to $246 bln from $151 bln for 2022, to $125 bln from $69 for 2023, and to $50 bln from $24 bln for 2024.

[Source: Tass, Moscow, 22jul22]

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